Currency Market Analysis

Aug 26, 2015 | Currency Market Analysis

Global Themes

The U.S. dollar Wednesday was off to a broadly firmer start, helped by a tentative improvement in market confidence, though underlying sentiment remained fitful. The dollar has been tossed about recently as troubles in China suggest the Federal Reserve would wait longer to raise interest rates. The dollar kept above this week’s seven-month lows but its immediate outlook remained unsteady. As long as the chaotic market landscape remains in place, the dollar would stand to lose against the safer yen and even the euro which has benefited from the turmoil as it has sent investors fleeing riskier investments such as carry trades. China’s main stock index overnight fell 1.3 percent. Wall Street today will try to end its longest losing streak in more than three years, a string of six down sessions in a row. Britain’s pound fell to one-week lows against the dollar, as expectations of higher interest rates in the U.K. diminished. The euro weakened by a penny from yesterday’s close, holding three cents below this week’s January high. Canada’s dollar edged a little above 11-year lows. America today will release data on durable goods.


Easing risk aversion sapped the euro of its main source of strength recently, keeping it below this week’s seven-month high. Lately, when stocks have fallen the euro has risen, a sign of how holders of risky assets have rushed to the exits. The euro stands to benefit when market mayhem flares as skittish investors take to buying back the euro which they used to fund bets on better returning assets. The euro remains built for weakness over the long run, hurt by the region’s low rate policies which contrast expectations of higher U.S. rates.


Sterling hit a one-week low, tumbling more than two cents from this week’s two-month high against the dollar. Global instability poses a potential shock to Britain’s recovery, a view that’s seen keeping any chance of a U.K. rate hike on ice for a while. Downside for the pound, though, could be stemmed by the pound’s traditional status as serving as a haven asset during uncertain times.


The Aussie dollar remained in the midst of a storm, holding near six-year lows, as it continued to sing the China blues. The outlook for the Aussie has taken a marked turn for the worst, as troubles in China risk intensifying headwinds on Australia’s export-driven economy. And once the turmoil in China subsides, it should shine a bright spotlight on the Fed which is expected to raise interest rates this year which would narrow Australia’s yield advantage.


An uptick in oil helped put a tentative floor under Canada’s loonie, one of the victims of the latest flare up in worries about all things China. Oil firmed but held at low levels below $40, suggesting very limited upside for the loonie.


The dollar enjoyed accelerated gains after strong news on the U.S. economy kept the Fed on track to raise interest rates. The door may be closed to a September rate hike but it’s not locked. That was the takeaway from durable goods which topped forecasts with a 2.0 percent rise in July which dashed expectations of a decline. The gauge of business spending posted its biggest gain in a year, rising 2.2 percent. The world’s biggest economy will remain in the spotlight over the balance of the week so constructive news Thursday on growth and inflation on Friday could turn up the heat on the Fed to lift rates which could help put the dollar on a strengthening path.

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